The Not-So-Great Recession

October 20, 2010

In an economic climate that is characterized by recession, not depression, President Obama's aggregate-demand-driven approach to recovery is suspect. Recessions are typically caused by industrial restructuring or realigning supply and demand, not massive, across-the-board declines in output or income (as it was during the Great Depression), says Samuel R. Staley, the Robert W. Galvin Fellow and Director of Urban & Land Use Policy at the Reason Foundation.

The steep recession of 1973-1975, for example, was triggered in part by price shocks resulting from a quadrupling of oil prices, resulting in significant reallocations of resources in the private sector as businesses, investors and consumers adjusted to the new realities of higher energy costs, less access to private capital and higher consumer prices.

The recession of 1980-1981 was accompanied by a further, even more dramatic restructuring of American industry through heightened international competition.

Economic downturns also took on distinctly regional characteristics: Midwestern and northeastern manufacturing economies crumbled while service-based and "new"-manufacturing southern and southwestern economies boomed.

The Great Recession's proximate cause was the bursting of the housing bubble, but this is far too simple an explanation.

Exotic financial instruments, with the help of federal housing and monetary policy, emerged to satisfy what seemed like an endless thirst for real-estate investment.

But the impacts were not even -- Texas has hardly experienced a blip, while California, Florida and Las Vegas have seen their housing markets collapse.

The nuances of recessionary declines are apparently lost in the current White House, which seems consumed with the belief that a massive federal response is necessary. President Obama continues to invoke the simplistic message of Great Depression-era decline, shunning the complexities of recent recessions that are likely much more relevant to today's economic challenges, says Staley.